SEE banking markets are ripe for consolidation

Hungary’s OTP has expanded in countries including Romania and Croatia.

By Clare Nuttall in BucharestFebruary 27, 2017

A new wave of consolidation is expected in Southeast Europe’s over-populated banking markets as both local and international players seek to build market share through acquisitions.

In Romania, Banca Transilvania recently announced that it had become the country’s second largest bank by assets, overtaking BRD-Societe Generale. Transilvania's 2016 results show the bank was catapulted into second place after its acquisition of troubled Volksbank Romania the previous year.

In a market where numerous small and mid-sized banks are struggling - Volksbank, for example, had a high exposure to Swiss franc loans - the acquisition by Transilvania serves as a model for the growing pattern of M&A among domestic banks as the healthier among them try to build themselves up into major local players. At the same time, the international banking groups that remain committed to the Romanian market have also been snapping up assets from former rivals seeking to exit.

Advisers forecast more of the same this year. Jonathan Wheatley, director, financial sector transactions at PwC, notes that a number of banks are currently in the sale process, and “we expect 2017 to be a year in which more than one banking transaction may take place”.

Wheatley lists numerous drivers for consolidation. “One of the most important factors has been the trend of foreign banks to refocus on their home markets since the onslaught of the financial crisis, often as a response to political pressure at home,” he tells bne IntelliNews.

“Other drivers include deleveraging as a condition for receiving state aid, where banks are required to divest non-core and non-strategic businesses in response to receiving a bail out from state authorities … There are also a number of mid-sized banks that are struggling to compete with the top-tier banks and may have to decide whether they wish to continue to operate in this market or not.”

This forecast comes in the context of the firm’s wider optimism regarding the Romanian M&A market in 2017, says his colleague, Cornelia Bumbacea, partner, transactions. M&A in the financial sector is expected to take place alongside consolidation in other sectors ranging from healthcare to industrial to media.

On the other hand, Alexandru Birsan of Bucharest-based law firm PeliFilip notes that, “while there have been some significant deals - notably UniCredit’s purchase of a 45% stake in its Romanian operations, the acquisition of Volksbank Romania by Banca Transilvania and the sale of Citi’s retail arm to Raiffeisen - overall there is a scarcity of buyers.” He adds: “The potential buyers are mainly people who are present here already. A natural buyer would be a banking group from the region, but the region was especially hard hit by the crisis.”

Wheatley says he has seen a high level of interest in the Romanian banking sector due to the country’s positive macro-economic situation and potential returns from the banking sector, but he still sounds a note of caution. “One of the main concerns of international investors has been the uncertainty surrounding the political and legal framework affecting the banking sector in Romania,” he says, citing the debt discharge law and the potential risk of banks having to convert Swiss franc loans to lei at historic exchange rates.

Birsan cites the same issues, along with non-performing loans, which “made banks somewhat difficult to digest”, though he adds that, “Recent developments in some of these areas are, however, encouraging in terms of a rebalancing of the risk levels.”

Some international banks active in Romania have launched legal challenges to the debt discharge law adopted in 2016, under which distressed mortgage borrowers are allowed to hand back their properties to the banks with no further obligation.

Over-banked

Following a similar path to Southeast Europe’s largest economy, transactions are also expected in other markets in the region. “SEE is not much different from other regions of the world in that it is over-banked,” says Hugh Owen, M&A partner at Allen & Overy Budapest and head of the law firm’s Southeast Europe desk.

Serbia in particular is considered a market ripe for consolidation. The sale of state-owned Komercijalna banka has been hotly anticipated, with expectations of a breakthrough in the long process of offloading the bank this year. Meanwhile, in 2016 the bank was rumoured to be planning to acquire an unnamed foreign bank in Serbia in an attempt to make it a more appealing target for future buyers.

M&A among smaller banks, as seen in neighbouring Romania, is also on the cards. “There are two sides to the M&A landscape in Serbia. Firstly, some of the larger banks are in the process of privatisation or about to start such processes,” says Alexander Rakosi, partner at CMS Reich-Rohrwig Hainz in Vienna.

“Secondly, the market is saturated in terms of coverage and density so medium-sized banks are looking for slightly smaller targets to consolidate and enter the upper echelon of financial institutions in that country.”

Slovenia has also been an active market for financial sector M&A in recent years, driven partly by efforts to restructure and sell off banks nationalised during the banking crisis in 2013. Ljubljana is required to sell off the country’s largest bank, Nova Ljubljanska Banka (NLB) this year under its commitments to the European Commission. The IPO is expected before the end of 2017, despite rumours that the government might ask Brussels for an extension.

The country’s third largest lender, Abanka, is also in state hands and has to be sold off by 2019. The bank has already been merged with Banka Celje in a transaction that closed in 2015, and was included on Slovenian Sovereign Holding’s privatisation plan for this year.

However, this may not be a smooth process. “Slovenia has usually had an extra layer of complexity to getting deals done, either through complex ownership structures, or politics getting in the way,” warns Owen.

Elsewhere in the region, Rakosi says the situation in Croatia is similar to that in Serbia. “There is consolidation on the market, with smaller banks being swallowed up by larger ones, while some of the larger players are offloading NPL portfolios, possibly as part of a bigger strategy for further M&A activity,” he tells bne IntelliNews.

Exit the Greeks

Another important driver for M&A is the ongoing withdrawal of Greek banking groups from the region.

“Reducing the foreign presence (and increasing the capital) of NBG, Piraeus Bank, Alpha Bank and Eurobank, the four largest Greek banks, is part of the European Commission’s plan designed to restructure the Greek banking sector,” says Owen. He points to previous deals such as Alpha Bank’s agreement to sell Alpha Bank Srbija to local MK Group. “Rumours abound (though some were recently denied) of pending bank sales by the Greek banks. The market sees many of these as inevitable,” he says.

Rakosi also expects more Greek banks could try to exit the Serbian market. “There are some initiatives on the non-performing loan front, and offloading NPL portfolios can be an indicator that banks are cleaning their balance sheets prior to contemplating additional strategic moves,” he says.

There has also been speculation about sales of the operations of the four Greek banks currently in Romania. Most recently, Eurobank confirmed to Reuters it had hired HSBC and Mediobanca to find a strategic investor for its Romanian subsidiary BancPost. Wheatley forecasts that at least some will exit the market in the next 18 months. However, he believes there are arguments in favour of at least one Greek banking group remaining in the country.

“It is important to note that Romania has been a core market for the Greek banks over the past 10 years and one of the few sources of profitability for them in recent years,” he says. “Moreover, there remain many Greek businesses active in Romania, who may be interested to have a Greek partner bank to operate with.”

At the same time as Greek banks - and to a lesser extent banking groups from some other European countries - are looking to exit Southeast Europe, new players are targeting the region.

At the height of the global financial crisis and immediately afterwards, when some banks were leaving the region, “there were one or two banks at that time who saw the opportunity to expand and took it”, says Owen, citing the example of Hungary’s OTP, which has expanded in countries including Romania and Croatia.

“In other cases, local players made some opportunistic acquisitions while the larger Western European banks were busy sorting out what to do in many of their larger markets, still less focusing in the short term on what to do in SEE.”

MK Group, owned by Serbian “sugar king” Miodrag Kostic, has become another force for consolidation. As well as snapping up Alpha Bank Srbija, he owns Serbian lender AIK banka, which recently got the go-ahead to raise its stake in Slovenian peer Gorenjska banka.

At the same time, advisers say international private equity firms are also eyeing the banking sector in the region, usually with the aim of buying up several banks and bolting them together to form a major player.

This strategy was employed by US fund Apollo in Slovenia, where it bought the 80% country’s second largest bank Nova Kreditna Banka Maribor NKBM alongside the European Bank for Reconstruction and Development (EBRD), which took a 20% stake. NKBM was later merged with Postna banka Slovenije in 2016.

However, a similar attempt by US investment fund JC Flowers to build a strong player in Romania fell through. The fund had planned to buy troubled Carpatica banka, which it then planned to merge with other small Romanian banks, but later dropped its plans after failing to buy Piraues Bank Romania.

But while investors are reportedly eyeing the larger SEE markets, in particular Romania, Serbia and Slovenia, appetite to enter the smaller countries is lower. Similar arguments for consolidation can be made for the smaller countries - Montenegro for example has 15 banks serving its population of just over 600,000. However, advisers say the expected returns for entering such small markets are unlikely to be sufficiently attractive to potential acquirers.

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